Have You Heard...

• China’s Fast Rise Leads Neighbors to Join Forces
• Analysis: Risks linger as China, Japan spar over islets
• Clinton Presses Beijing on Koreas
• U.S. Defense Department Sees No Rare-Earths Crisis; May Aid U.S. Producers
• Shanghai's World Expo to Close After Attracting Record 72 Million Visitors

China’s Fast Rise Leads Neighbors to Join Forces

Source: New York Times By Mark Landler, Jim Yardley and Michael Wines

HANOI, Vietnam — China’s military expansion and assertive trade policies have set off jitters across Asia, prompting many of its neighbors to rekindle old alliances and cultivate new ones to better defend their interests against the rising superpower.

A whirl of deal-making and diplomacy, from Tokyo to New Delhi, is giving the United States an opportunity to reassert itself in a region where its eclipse by China has been viewed as inevitable.

President Obama’s trip to the region this week, his most extensive as president, will take him to the area’s big democracies, India, Indonesia, South Korea and Japan, skirting authoritarian China. Those countries and other neighbors have taken steps, though with varying degrees of candor, to blunt China’s assertiveness in the region.

Mr. Obama and Prime Minister Manmohan Singh of India are expected to sign a landmark deal for American military transport aircraft and are discussing the possible sale of jet fighters, which would escalate the Pentagon’s defense partnership with India to new heights. Japan and India are courting Southeast Asian nations with trade agreements and talk of a “circle of democracy.” Vietnam has a rapidly warming rapport with its old foe, the United States, in large part because its old friend, China, makes broad territorial claims in the South China Sea.

The deals and alliances are not intended to contain China. But they suggest a palpable shift in the diplomatic landscape, on vivid display as leaders from 18 countries gathered this weekend under the wavelike roof of Hanoi’s futuristic convention center, not far from Ho Chi Minh’s mausoleum, for a meeting suffused by tensions between China and its neighbors.

China’s escalating feud with Japan over another set of islands, in the East China Sea, stole the meeting’s headlines on Saturday, and Secretary of State Hillary Rodham Clinton proposed three-way negotiations to resolve the issue.

Most Asian countries, even as they argue that China will inevitably replace the United States as the top regional power, have grown concerned at how quickly that shift is occurring, and what China the superpower may look like.

China’s big trading partners are complaining more loudly that it intervenes too aggressively to keep its currency undervalued. Its recent restrictions on exports of crucial rare earths minerals, first to Japan and then to the United States and Europe, raised the prospect that it may use its dominant positions in some industries as a diplomatic and political weapon.

And its rapid naval expansion, combined with a more strident defense of its claims to disputed territories far off its shores, has persuaded Japan, South Korea, Vietnam and Singapore to reaffirm their enthusiasm for the American security umbrella.

“The most common thing that Asian leaders have said to me in my travels over this last 20 months is, ‘Thank you, we’re so glad that you’re playing an active role in Asia again,’ ” Mrs. Clinton said in Hawaii, opening a seven-country tour of Asia that included a last-minute stop in China.

Few of China’s neighbors voice their concerns about the country publicly, but analysts and diplomats say they express wariness about the pace of China’s military expansion and the severity of its trade policies in private.

“Most of these countries have come to us and said, ‘We’re really worried about China,’ ” said Kenneth G. Lieberthal, a China adviser to President Bill Clinton who is now at the Brookings Institution.

The Obama administration has been quick to capitalize on China’s missteps. Where officials used to speak of China as the Asian economic giant, they now speak of India and China as twin giants. And they make clear which one they believe has a closer affinity to the United States.

“India and the United States have never mattered more to each other,” Mrs. Clinton said. “As the world’s two largest democracies, we are united by common interests and common values.”

As Mr. Obama prepares to visit India in his first stop on his tour of Asian democracies, Mr. Singh, India’s prime minister, will have just returned from his own grand tour — with both of them somewhat conspicuously, if at least partly coincidentally, circling China.

None of this seems likely to lead to a cold war-style standoff. China is fully integrated into the global economy, and all of its neighbors are eager to deepen their ties with it. China has fought no wars since a border skirmish with Vietnam three decades ago, and it often emphasizes that it has no intention of projecting power through the use of force.

At the same time, fears that China has become more assertive as it has grown richer are having real consequences.

India is promoting itself throughout the region as a counterweight to China; Japan is settling a dispute with the United States over a Marine air base; the Vietnamese are negotiating a deal to obtain civilian nuclear technology from the United States; and the Americans, who had largely ignored the rest of Asia as they waged wars in Afghanistan and Iraq, see an opportunity to come back in a big way.

In July, for example, Mrs. Clinton reassured Vietnam and the Philippines by announcing that the United States would be willing to help resolve disputes between China and its neighbors over a string of strategically important islands in the South China Sea.

China’s foreign minister, Yang Jiechi, reacted furiously, accusing the United States of plotting against it, according to people briefed on the meeting. Mr. Yang went on to note that China was a big country, staring pointedly at the foreign minister of tiny Singapore. Undaunted, Mrs. Clinton not only repeated the American pledge on the South China Sea in Hanoi on Saturday, but expanded it to include the dispute with Japan.

China’s rise as an authoritarian power has also revived a sense that democracies should stick together. K. Subrahmanyam, an influential strategic analyst in India, noted that half the world’s people now live in democracies and that of the world’s six biggest powers, only China has not accepted democracy.

“Today the problem is a rising China that is not democratic and is challenging for the No. 1 position in the world,” he said.

Indeed, how to deal with China seems to be an abiding preoccupation of Asia’s leaders. In Japan, Prime Minister Naoto Kan and Mr. Singh discussed China’s booming economy, military expansion and increased territorial assertiveness.

“Prime Minister Kan was keen to understand how India engages China,” India’s foreign secretary, Nirupama Rao, told reporters. “Our prime minister said it requires developing trust, close engagement and a lot of patience.”

South Korea was deeply frustrated earlier this year when China blocked an explicit international condemnation of North Korea for sinking a South Korean warship, the Cheonan. South Korea accused North Korea of the attack, but China, a historic ally of the North, was unwilling to hold it responsible.

India has watched nervously as China has started building ports in Sri Lanka and Pakistan, extending rail lines toward the border of Nepal, and otherwise seeking to expand its footprint in South Asia.

India’s Defense Ministry has sought military contacts with a host of Asian nations while steadily expanding contacts and weapons procurements from the United States. The United States, American officials said, has conducted more exercises in recent years with India than with any other nation.

Mr. Singh’s trip was part of his “Look East” policy, intended to broaden trade with the rest of Asia. He has said it was not related to any frictions with China, but China is concerned. On Thursday, People’s Daily, the Communist Party newspaper, ran an opinion article asking, “Does India’s ‘Look East’ Policy Mean ‘Look to Encircle China’?”

That wary view may well reflect China’s reaction to the whole panoply of developments among its neighbors.

“The Chinese perceived the Hanoi meeting as a gang attack on them,” said Charles Freeman, an expert on Chinese politics and economics at the Center for Strategic and International Studies. “There’s no question that they have miscalculated their own standing in the region.”

Analysis: Risks linger as China, Japan spar over islets

Source: Reuters By James Pomfret and John Ruwitch

(Reuters) - Japan and China talk of building a strategic partnership but they can't seem to avoid tactical scraps.

A high-profile breakdown in diplomacy over the question of whether Chinese Premier Wen Jiabao and Japanese Prime Minister Naoto Kan would meet one-on-one at a regional summit in Hanoi has raised questions about the risks from lingering brinksmanship between Asia's two biggest economies.

After some encouraging steps to repair a rift over Japan's detention of a Chinese fishing boat captain in disputed waters in the East China Sea, possibly rich in oil, natural gas and minerals, ties once again crumbled.

The reasons are not crystal clear. Assistant Chinese Foreign Minister Hu Zhengyue accused Japan of ruining the atmosphere by "inflaming" the East China Sea issue in collusion with others -- a veiled reference to the United States.

But below the surface, personal grudges, sensitive domestic political considerations and lack of policy coordination are likely to have played a part.

The tension was so awkward that unease spread among Southeast Asian nations at the regional talks, deflecting focus away from other topics like currency pressures, and prompting U.S. Secretary of State Hillary Clinton to offer to mediate trilateral talks with Japan and China to cool things down.

In the end, Kan and Wen did have a one-on-one chat, away from the cameras and for only 10 minutes, Japanese officials said. No mention was made of the meeting by state Chinese media.

"It is very difficult for China and Japan to step down from the summit point of the crisis in September," said Shi Yinhong, international relations expert at Renmin University in Beijing.

PERSONAL VENDETTA?

The row might be Chinese recrimination for the at-times blunt diplomacy of Japan's new 48-year-old foreign minister, Seiji Maehara, Shi said.

Maehara once called the Chinese suspension of high-level official exchanges "extremely hysterical," comments which a Chinese foreign ministry spokesman called deeply shocking.

"In China's eyes, the single biggest obstacle for rapprochement is the Japanese foreign minister," said Shi. "I think he, personally, plays a very negative role."

China and Japan talk of building a strategic relationship, but the two can get mired in distracting issues such as visits by Japanese leaders to a wartime shrine, and the Diaoyu isles, or Senkaku as they're known in Japan. China is Japan's biggest trading partner with bilateral trade worth $270 billion in 2009.

All this comes as a strengthening China, which suffered a Japanese invasion and brutal occupation of parts of the country from 1931 to 1945, flexes its muscles on the world stage, moving further from a stance of non-interference in the affairs of others, partly driven by its voracious appetite for resources.

"China's leaders have realized that maintaining economic growth and political stability on the home front will come not from keeping their heads low, but rather from actively managing events outside China's borders," wrote Elizabeth Economy, director of Asia Studies at the Council on Foreign Relations.

China and Japan have long-locked horns over sovereignty claims in the East China Sea, but such disputes have rarely damaged commercial ties.

SMOULDERING EMBERS

The stakes are potentially huge. A disputed undersea basin could yield 20 million barrels of oil and 17.5 trillion cubic feet of natural gas, equal to a fifth of China's gas reserves.

While previous rows over the islands have tended to fizzle out, reported curbs of rare earth minerals, crucial for the manufacture of high technology products, have complicated the diplomatic dance, with Japan in particular highly reliant on the metals and eager to not get squeezed.

China produces some 97 percent of global rare earths and has promised not to abuse its virtual monopoly, yet Japan has still scrambled to ease its reliance on China by staking deals with other nations like Vietnam.

Stability-obsessed leaders in Beijing also have domestic considerations to consider, with anti-Japan protests likely to flare-up again at any time.

Some Japanese media have blamed domestic pressures on the Chinese Communist leadership for not compromising with Japan.

"The smoldering embers of the anti-Japanese demonstrations and growing social gaps could well turn into criticism of the (Chinese) government," the Nikkei daily said in a commentary.

"It is also possible that an intensified consciousness of being a major power is giving rise to internal conflict within the Chinese Communist Party over policy."

Many Chinese still harbor deep resentment of Japan's wartime occupation and have pressured Beijing to stand up to Tokyo as a matter of principle.

Territorial disputes resonate in many of China's Southeast Asian neighbors which have overlapping claims in the South China Sea and are unnerved by China's assertiveness and growing navy.

"China is transforming the world as it transforms itself," wrote Economy in her article. "Never mind notions of a responsible stakeholder; China has become a revolutionary power."

Clinton Presses Beijing on Koreas

Source: Wall Street Journal by Jay Solomon

SANYA, China—U.S. Secretary of State Hillary Clinton pressed Beijing's top foreign-affairs official during a meeting Saturday on the Chinese island of Hainan to do more to restrain North Korea from taking provocative actions against South Korea.

Mrs. Clinton also offered to mediate a territorial dispute between China and Japan, as the Obama administration seeks an increasingly central role in addressing rising Asian security threats.

U.S. officials are concerned that Pyongyang could seek to disrupt Seoul's hosting on Nov. 11-12 the Group of 20 conference of major economic nations. Asian media reports in recent weeks have suggested North Korean leader Kim Jong Il could be preparing to stage his country's third nuclear test—something U.S. officials wouldn't rule out on Saturday.

"We're right on the verge of one of the most important diplomatic functions in the history of the Korean Peninsula, with the hosting of the G-20," said a senior U.S. official who took part in Mrs. Clinton's 2½-hour meeting with Dai Bingguo in Hainan. "We have made very clear to China that we expect it to weigh in in Pyongyang about the need to in no way take provocative steps during this delicate time."

The State Department official said Mrs. Clinton and Mr. Dai also discussed joint preparations for China President Hu Jintao to visit Washington early in 2011. And they sought to lay out a clear path for Washington and Beijing to resume normal military contacts as a means to address regional security challenges. U.S. Defense Secretary Robert Gates repeatedly has expressed his desire to visit Beijing at the earliest possible time.

Mrs. Clinton's trip to Hainan is a sensitive issue for Washington. In 2001, Chinese security forces grounded an American EP-3 surveillance plane on the island after it collided with a Chinese jet fighter. The plane's 24-person crew were held and interrogated for 10 days and released only after the Bush administration issued an apology for the incident.

Earlier Saturday in Hanoi, Vietnam, Mrs. Clinton became the first U.S. secretary of state to attend the East Asia Summit, a gathering of 10 Southeast Asian nations and other regional powers, such as China, South Korea and Japan. The Obama administration views the summit, as well as the Association of Southeast Asian Nations, as key forums through which to press U.S. interests in the Asia-Pacific.

The meeting of 18 countries, however, was dominated by a continuing diplomatic row between China and Japan over disputed islands in the East China Sea—alternately called Diaoyu by Beijing and Senkaku by Tokyo.

Asian leaders had hoped the two countries could use the East Asia Summit to reduce tensions sparked last month when Japan's coast guard detained a Chinese sailor whose boat challenged Tokyo's maritime lines. Tempers flared anew this weekend when Japan's foreign minister restated his country's sovereignty over the islands and Chinese Premier Wen Jiabao refused to hold a bilateral meeting with Japanese Prime Minister Naoto Kan.

U.S. officials said Saturday that Mrs. Clinton, both in meetings with Mr. Dai and with Chinese Foreign Minister Yang Jiechi, offered to host a trilateral meeting with China and Japan to address the islands dispute, as well as broader security and economic issues. Mrs. Clinton stressed in Hanoi that Washington fears the fallout of any further deterioration in relations between Beijing and Tokyo.

"It is in all of our interest for China and Japan to have stable, peaceful relations," Mrs. Clinton told a news conference. "We have recommended to both that the United States is more than willing to host a trilateral, where we would bring Japan and China and their foreign ministers together to discuss a range of issues."

Washington is walking a fine diplomatic line in the island dispute. While the U.S. says it is committed to defend the islands under its 50-year-old defense treaty with Japan, it has also stated that the U.S. takes no position on who ultimately controls them.

China was noncommittal to attending the trilateral meeting. And the foreign minister cautioned the U.S. on its position. "[He] urged the U.S. to be cautious in both wording and action in the issue of Diaoyu Islands, a highly sensitive issue," China's Foreign Ministry said in a statement.

Mrs. Clinton used her speech at the East Asia Summit to again call for the establishment of an international legal mechanism through which to solve territorial disputes in Asia. A similar comment made by Mrs. Clinton in July at another Asian regional conference in Hanoi sparked outrage in Beijing and led to Chinese charges that the U.S. was intervening in Beijing's internal affairs. China claims sovereignty over all of the South China Sea.

"The United States has a national interest in the freedom of navigation and unimpeded lawful commerce," Mrs. Clinton said during her speech. "And when disputes arise over maritime territory, we are committed to resolving them peacefully based on customary international law."

Mrs. Clinton then praised Beijing for entering into discussions with the 10 members of the Association of Southeast Asian Nations, or Asean, on a "binding code of conduct" for their activities in the South China Sea.

Mrs. Clinton did appear to make progress Saturday in diminishing fears that China might use its monopoly over rare-earth materials as a political weapon against Japan and other competitors.

The U.S. and Japan have voiced concerns over the past week that China was cutting drastically its exports of rare-earth minerals, used to produce computers and other electronic items, as political leverage. China controls 97% of the world's supply of the commodity, and Mrs. Clinton has urged other Asian nations to develop alternative sources for the minerals. China curtailed rare-earth quotas earlier this year, citing environmental concerns and efforts to quell smuggling.

U.S. officials said Saturday that Messrs. Yang and Dai stressed that Beijing had no policy to restrict the sales of its mineral assets. "Minister Yang clarified that China has no intention of withholding these minerals from the market. He said he wanted to make that very clear, Mrs. Clinton said during her news conference.

Japanese Prime Minister Kan said Sunday, after meeting with his Vietnamese counterpart, Nguyen Tan Dung, in Hanoi, that Vietnam chose Japan as a partner to mine rare-earth metals and to develop nuclear power in the Communist country, the Associated Press reported.

The Obama administration is seeking to significantly increase its diplomatic presence in Asia, as a number of U.S. allies in the region voice concerns about China's increasingly assertive positions on territorial, security and economic issues.

The U.S. is specifically seeking to use the offices of Asean as a mechanism through which to press U.S. interests and to galvanize the Southeast Asian states in the face of China's growing military power. The U.S. also has taken steps in recent months to deepen its military alliances with Japan, South Korea, Thailand and the Philippines.

"As the [East Asia Summit] evolves, we believe Asean should continue to play a central role," Mrs. Clinton said in her speech. "As I said earlier this week, we view Asean as a fulcrum for the region's emerging regional architecture."

Beijing has expressed wariness about the U.S. buildup of Asean and its growing diplomatic activities in the region. Some Chinese officials have said Washington is seeking to use Asean and its military alliances to encircle China —a charge the Obama administration denies.

U.S. Defense Department Sees No Rare-Earths Crisis; May Aid U.S. Producers

Source: Bloomberg

The U.S. Defense Department has concluded that China’s monopoly on rare-earth materials, used in military hardware such as missile guidance and radar systems, poses no threat to national security, according to a person familiar with a year-long study by the Pentagon.

The report notes that rising prices and supply uncertainties are spurring private investment in new mining operations outside of China that will help meet American military needs, which require less than 5 percent of U.S. rare- earth consumption.

China now provides 97 percent of the world’s rare earths, a group of 17 metals that includes neodymium, samarium, and dysprosium.

The study, conducted by the Pentagon’s Office of Industrial Policy, raises the possibility that the Defense Department may help prospective U.S. providers such as Molycorp Inc., the person said, speaking on the condition of anonymity because the report has not yet been released publicly.

The findings and recommendations may be presented this week to U.S. lawmakers, who have been alarmed by China’s actions since July to reduce rare-earths exports by about three- quarters. The House on Sept. 29 passed legislation that includes authority for federal loan guarantees for domestic rare-earth producers, and House members such as Representative Bart Gordon, chairman of the Committee on Science and Technology, have urged senators to act on the measure during the post-election session because of concern about China’s market dominance.

Bombs and Lasers

China’s export-quota cuts and delays in Customs’ clearance have led to sharply higher prices and supply concerns among users, including manufacturers of mobile phones, computer hard- disk drives and flat-screen monitors.

Supply constraints haven’t stopped production of equipment such as radar, precision-guided bombs, and night-vision equipment that require powerful magnets and lasers made with rare-earth materials, the Defense Department study found.

The Pentagon expects the supply situation to improve by 2013 once rare-earth mines outside of China, such as one planned by Australia’s Lynas Corp. Ltd., begin operations next year, said the person familiar with the findings.

The study says that demand-supply gaps for neodymium, dysprosium, praseodymium, each used in magnets, as well as for yttrium, used in lasers, are likely persist longer than for the 13 other elements, and that commercial manufacturers such as General Electric Co., maker of wind turbines that use neodymium- iron-boron magnets, are likely to face more shortages than defense contractors, the study found.

Loan Guarantee

The study recommends, among other steps, an examination of how the Defense Department could aid companies such as Molycorp, which has applied to the Energy Department for $280 million in U.S. government loan guarantees to help finance restarting its open-pit, rare-earths mine in Mountain Pass, California, in the Mojave Desert.

The mine once met almost all the world’s demand for rare- earth metals. It shut down in 2002 due to competition from cheaper Chinese supplies. Molycorp plans to resume production by the end of 2012.

Under Title III of the Defense Production Act of 1950, the Pentagon can provide financial incentives to industry to make investments in production capabilities for materials deemed to be in the national interest.

The study recommends more international cooperation among mine operators, magnet-makers and governments that use the components. It also calls for more research by national laboratories into alternatives or substitutes for rare-earth- based components.

Tracking Materials

The Pentagon found that neither defense contractors, like Lockheed Martin Corp., Raytheon Co., and General Dynamics Corp., nor government agencies currently track the use of rare-earth materials in the thousands of weapons bought by the U.S. military. The rare-earth components that go into the systems are treated like commodities, the person said.

Magnets made with samarium-cobalt are widely used in defense applications because the material maintains its magnetic properties even in high-heat conditions found inside missiles and bombs, the Pentagon found in its assessment.

China accounts for about 36 percent of global rare-earth reserves, the largest share, and the U.S. is second, with 13 percent, according to the U.S. Geological Survey. Chinese officials including Premier Wen Jiabao have said the country has not halted shipments of material and will continue to supply the material.

Shanghai's World Expo to Close After Attracting Record 72 Million Visitors

Source: Bloomberg

Shanghai’s $44 billion World Expo closes today after China’s richest city hosted a record number of visitors during the six-month event.

A ceremony will be held in the evening along the city’s Huangpu river, with leaders including Chinese Premier Wen Jiabao and United Nations Secretary-General Ban Ki-moon in attendance. The Expo has attracted almost 73 million visitors since it opened to the public on May 1, according to its website, surpassing the 64 million people that attended the 1970 expo in Osaka, Japan.

Authorities in Shanghai campaigned against spitting and littering, expanded the subway system and built two new airport terminals to prepare for the biggest event to be held in the city. The exhibition, with pavilions from about 190 nations from the U.S. to North Korea, may lift Shanghai’s economic growth to more than 8.5 percent this year from 8.2 percent in 2009, the Shanghai Academy of Social Sciences estimates.

“The Expo was a turning point for Shanghai as the city now moves up the ranks of the world’s metropolises,” said Tu Qiyu, head of the Shanghai Academy of Social Sciences’s urban research center. “The Expo has been a huge education for Shanghai and many Chinese in modernization.”

After winning hosting rights in 2002, Shanghai allotted 28.6 billion yuan ($4.3 billion) for construction and operating costs and 270 billion yuan for infrastructure, including the airport terminals and a three-year renovation of The Bund waterfront area. Shanghai’s growth last year was at the slowest pace in 18 years.

Shanghai Subway

Shanghai accelerated its expansion of the subway system to more than 400 kilometers to meet demand from the influx of visitors during the Expo, making it the biggest city transport underground network in China.

“The Expo provided a short-term boost for the local retail and hospitality sectors,” said Jing Ulrich, chairwoman for China equities and commodities at JPMorgan Chase & Co. in Hong Kong. “The long-term benefits will be realized through the significant investment in infrastructure, which have opened up whole new districts and markets in and around Shanghai.”

The event may have generated tourism spending of more than 80 billion yuan for Shanghai and neighboring cities along the Yangtze River, the state-run Xinhua News Agency reported on Oct. 26, citing the China Tourism Academy.

The attractions included pavilions of cultural and corporate displays, with Denmark shipping across the bronze Little Mermaid statue from Copenhagen’s waterfront and General Electric Co., BP Plc, Coca-Cola Co. and Johnson & Johnson among the sponsors.

Raised Profile

The Expo raised the city’s profile and highlighted the “hardware” of world-class offices and five-star hotels that will help to attract foreign businesses, said Victoria Mio, a regular visitor to the city who is a Hong Kong-based senior fund manager at Robeco Group, which oversees about $186 billion.

As part of sprucing up the city, the government asked residents to drop a local habit of walking on the streets in pajamas.

The Expo was part of an investment campaign in the city of 19.2 million people that China aims to develop into a global financial center by 2020. That goal may be hampered by the nation’s restrictions on capital flows and its currency, the yuan or renminbi.

A 29.3 billion yuan high-speed rail line connecting Shanghai and Hangzhou, the capital city of Zhejiang province, started operating on Oct. 26, while The Bund, Shanghai’s colonial-era waterfront strip, will be further developed as a center for financial companies. Construction on Walt Disney Co.’s theme park in Shanghai will start in November, the Shanghai Securities News reported on Oct. 18.

Container Port

Shanghai overtook Singapore as the world’s busiest container port in August, operates China’s biggest stock exchange by market capitalization, and its economy last year surpassed Hong Kong’s.

Still, an absence of transparent market regulation, the free flow of information and the rule of law means the city is “nowhere near” replacing Hong Kong as a financial center, said James McGregor, a senior counselor in Beijing at public-affairs company APCO Worldwide and author of the book “One Billion Customers.”

Have You Heard...

• The Online Threat
• Japanese statements violate China's sovereignty
• U.S. not seeking to "contain" China: Clinton
• China Is Said to Resume Shipping Rare Earth Minerals
• Chinese May Have Fastest Supercomputer, Nvidia Says

The Online Threat

Source: The New Yorker by Seymour M. Hersh

On April 1, 2001, an American EP-3E Aries II reconnaissance plane on an eavesdropping mission collided with a Chinese interceptor jet over the South China Sea, triggering the first international crisis of George W. Bush’s Administration. The Chinese jet crashed, and its pilot was killed, but the pilot of the American aircraft, Navy Lieutenant Shane Osborn, managed to make an emergency landing at a Chinese F-8 fighter base on Hainan Island, fifteen miles from the mainland. Osborn later published a memoir, in which he described the “incessant jackhammer vibration” as the plane fell eight thousand feet in thirty seconds, before he regained control.

The plane carried twenty-four officers and enlisted men and women attached to the Naval Security Group Command, a field component of the National Security Agency. They were repatriated after eleven days; the plane stayed behind. The Pentagon told the press that the crew had followed its protocol, which called for the use of a fire axe, and even hot coffee, to disable the plane’s equipment and software. These included an operating system created and controlled by the N.S.A., and the drivers needed to monitor encrypted Chinese radar, voice, and electronic communications. It was more than two years before the Navy acknowledged that things had not gone so well. “Compromise by the People’s Republic of China of undestroyed classified material . . . is highly probable and cannot be ruled out,” a Navy report issued in September, 2003, said.

The loss was even more devastating than the 2003 report suggested, and its dimensions have still not been fully revealed. Retired Rear Admiral Eric McVadon, who flew patrols off the coast of Russia and served as a defense attaché in Beijing, told me that the radio reports from the aircraft indicated that essential electronic gear had been dealt with. He said that the crew of the EP-3E managed to erase the hard drive—“zeroed it out”—but did not destroy the hardware, which left data retrievable: “No one took a hammer.” Worse, the electronics had recently been upgraded. “Some might think it would not turn out as badly as it did, but I sat in some meetings about the intelligence cost,” McVadon said. “It was grim.”

The Navy’s experts didn’t believe that China was capable of reverse-engineering the plane’s N.S.A.-supplied operating system, estimated at between thirty and fifty million lines of computer code, according to a former senior intelligence official. Mastering it would give China a road map for decrypting the Navy’s classified intelligence and operational data. “If the operating system was controlling what you’d expect on an intelligence aircraft, it would have a bunch of drivers to capture radar and telemetry,” Whitfield Diffie, a pioneer in the field of encryption, said. “The plane was configured for what it wants to snoop, and the Chinese would want to know what we wanted to know about them—what we could intercept and they could not.” And over the next few years the U.S. intelligence community began to “read the tells” that China had access to sensitive traffic.

The U.S. realized the extent of its exposure only in late 2008. A few weeks after Barack Obama’s election, the Chinese began flooding a group of communications links known to be monitored by the N.S.A. with a barrage of intercepts, two Bush Administration national-security officials and the former senior intelligence official told me. The intercepts included details of planned American naval movements. The Chinese were apparently showing the U.S. their hand. (“The N.S.A. would ask, ‘Can the Chinese be that good?’ ” the former official told me. “My response was that they only invented gunpowder in the tenth century and built the bomb in 1965. I’d say, ‘Can you read Chinese?’ We don’t even know the Chinese pictograph for ‘Happy hour.’ ”)

Why would the Chinese reveal that they had access to American communications? One of the Bush national-security officials told me that some of the aides then working for Vice-President Dick Cheney believed—or wanted to believe—that the barrage was meant as a welcome to President Obama. It is also possible that the Chinese simply made a mistake, given the difficulty of operating surgically in the cyber world.

Admiral Timothy J. Keating, who was then the head of the Pacific Command, convened a series of frantic meetings in Hawaii, according to a former C.I.A. official. In early 2009, Keating brought the issue to the new Obama Administration. If China had reverse-engineered the EP-3E’s operating system, all such systems in the Navy would have to be replaced, at a cost of hundreds of millions of dollars. After much discussion, several current and former officials said, this was done. (The Navy did not respond to a request for comment on the incident.)

Admiral McVadon said that the loss prompted some black humor, with one Navy program officer quoted as saying, “This is one hell of a way to go about getting a new operating system.”

The EP-3E debacle fuelled a longstanding debate within the military and in the Obama Administration. Many military leaders view the Chinese penetration as a warning about present and future vulnerabilities—about the possibility that China, or some other nation, could use its expanding cyber skills to attack America’s civilian infrastructure and military complex. On the other side are those who argue for a civilian response to the threat, focussed on a wider use of encryption. They fear that an overreliance on the military will have adverse consequences for privacy and civil liberties.

In May, after years of planning, the U.S. Cyber Command was officially activated, and took operational control of disparate cyber-security and attack units that had been scattered among the four military services. Its commander, Army General Keith Alexander, a career intelligence officer, has made it clear that he wants more access to e-mail, social networks, and the Internet to protect America and fight in what he sees as a new warfare domain—cyberspace. In the next few months, President Obama, who has publicly pledged that his Administration will protect openness and privacy on the Internet, will have to make choices that will have enormous consequences for the future of an ever-growing maze of new communication techniques: Will America’s networks be entrusted to civilians or to the military? Will cyber security be treated as a kind of war?

Even as the full story of China’s EP-3E coup remained hidden, “cyber war” was emerging as one of the nation’s most widely publicized national-security concerns. Early this year, Richard Clarke, a former White House national-security aide who warned about the threat from Al Qaeda before the September 11th attacks, published “Cyber War,” an edgy account of America’s vulnerability to hackers, both state-sponsored and individual, especially from China. “Since the late 1990s, China has systematically done all the things a nation would do if it contemplated having an offensive cyber war capability,” Clarke wrote. He forecast a world in which China might unleash havoc:

Within a quarter of an hour, 157 major metropolitan areas have been thrown into knots by a nationwide power blackout hitting during rush hour. Poison gas clouds are wafting toward Wilmington and Houston. Refineries are burning up oil supplies in several cities. Subways have crashed in New York, Oakland, Washington, and Los Angeles. . . . Aircraft are literally falling out of the sky as a result of midair collisions across the country. . . . Several thousand Americans have already died.

Retired Vice-Admiral J. Michael McConnell, Bush’s second director of National Intelligence, has issued similar warnings. “The United States is fighting a cyber war today, and we are losing,” McConnell wrote earlier this year in the Washington Post. “Our cyber-defenses are woefully lacking.” In February, in testimony before the Senate Commerce, Science, and Transportation Committee, he said, “As a consequence of not mitigating the risk, we’re going to have a catastrophic event.”

A great deal of money is at stake. Cyber security is a major growth industry, and warnings from Clarke, McConnell, and others have helped to create what has become a military-cyber complex. The federal government currently spends between six and seven billion dollars annually for unclassified cyber-security work, and, it is estimated, an equal amount on the classified portion. In July, the Washington Post published a critical assessment of the unchecked growth of government intelligence agencies and private contractors. Benjamin Powell, who served as general counsel for three directors of the Office of National Intelligence, was quoted as saying of the cyber-security sector, “Sometimes there was an unfortunate attitude of bring your knives, your guns, your fists, and be fully prepared to defend your turf. . . . Because it’s funded, it’s hot and it’s sexy.”

Clarke is the chairman of Good Harbor Consulting, a strategic-planning firm that advises governments and companies on cyber security and other issues. (He says that more than ninety per cent of his company’s revenue comes from non-cyber-related work.) McConnell is now an executive vice-president of Booz Allen Hamilton, a major defense contractor. Two months after McConnell testified before the Senate, Booz Allen Hamilton landed a thirty-four-million-dollar cyber contract. It included fourteen million dollars to build a bunker for the Pentagon’s new Cyber Command.

American intelligence and security officials for the most part agree that the Chinese military, or, for that matter, an independent hacker, is theoretically capable of creating a degree of chaos inside America. But I was told by military, technical, and intelligence experts that these fears have been exaggerated, and are based on a fundamental confusion between cyber espionage and cyber war. Cyber espionage is the science of covertly capturing e-mail traffic, text messages, other electronic communications, and corporate data for the purpose of gathering national-security or commercial intelligence. Cyber war involves the penetration of foreign networks for the purpose of disrupting or dismantling those networks, and making them inoperable. (Some of those I spoke to made the point that China had demonstrated its mastery of cyber espionage in the EP-3E incident, but it did not make overt use of it to wage cyber war.) Blurring the distinction between cyber war and cyber espionage has been profitable for defense contractors—and dispiriting for privacy advocates.

Clarke’s book, with its alarming vignettes, was praised by many reviewers. But it received much harsher treatment from writers in the technical press, who pointed out factual errors and faulty assumptions. For example, Clarke attributed a severe power outage in Brazil to a hacker; the evidence pointed to sooty insulators.

The most common cyber-war scare scenarios involve America’s electrical grid. Even the most vigorous privacy advocate would not dispute the need to improve the safety of the power infrastructure, but there is no documented case of an electrical shutdown forced by a cyber attack. And the cartoonish view that a hacker pressing a button could cause the lights to go out across the country is simply wrong. There is no national power grid in the United States. There are more than a hundred publicly and privately owned power companies that operate their own lines, with separate computer systems and separate security arrangements. The companies have formed many regional grids, which means that an electrical supplier that found itself under cyber attack would be able to avail itself of power from nearby systems. Decentralization, which alarms security experts like Clarke and many in the military, can also protect networks.

In July, there were reports that a computer worm, known as Stuxnet, had infected thousands of computers worldwide. Victims, most of whom were unharmed, were able to overcome the attacks, although it sometimes took hours or days to even notice them. Some of the computers were inside the Bushehr nuclear-energy plant, in Iran, and this led to speculation that Israel or the United States might have developed the virus. A Pentagon adviser on information warfare told me that it could have been an attempted “semantic attack,” in which the virus or worm is designed to fool its victim into thinking that its computer systems are functioning properly, when in fact they are not, and may not have been for some time. (This month, Microsoft, whose Windows operating systems were the main target of Stuxnet, completed a lengthy security fix, or patch.)

If Stuxnet was aimed specifically at Bushehr, it exhibited one of the weaknesses of cyber attacks: they are difficult to target and also to contain. India and China were both hit harder than Iran, and the virus could easily have spread in a different direction, and hit Israel itself. Again, the very openness of the Internet serves as a deterrent against the use of cyber weapons.

Bruce Schneier, a computer scientist who publishes a widely read blog on cyber security, told me that he didn’t know whether Stuxnet posed a new threat. “There’s certainly no actual evidence that the worm is targeted against Iran or anybody,” he said in an e-mail. “On the other hand, it’s very well designed and well written.” The real hazard of Stuxnet, he added, might be that it was “great for those who want to believe cyber war is here. It is going to be harder than ever to hold off the military.”

A defense contractor who is regarded as one of America’s most knowledgeable experts on Chinese military and cyber capabilities took exception to the phrase “cyber war.” “Yes, the Chinese would love to stick it to us,” the contractor told me. “They would love to transfer economic and business innovation from West to East. But cyber espionage is not cyber war.” He added, “People have been sloppy in their language. McConnell and Clarke have been pushing cyber war, but their evidentiary basis is weak.”

James Lewis, a senior fellow at the Center for Strategic and International Studies, who worked for the Departments of State and Commerce in the Clinton Administration, has written extensively on the huge economic costs due to cyber espionage from China and other countries, like Russia, whose hackers are closely linked to organized crime. Lewis, too, made a distinction between this and cyber war: “Current Chinese officials have told me that we’re not going to attack Wall Street, because we basically own it”—a reference to China’s holdings of nearly a trillion dollars in American securities—“and a cyber-war attack would do as much economic harm to us as to you.”

Nonetheless, China “is in full economic attack” inside the United States, Lewis says. “Some of it is economic espionage that we know and understand. Some of it is like the Wild West. Everybody is pirating from everybody else. The U.S.’s problem is what to do about it. I believe we have to begin by thinking about it”—the Chinese cyber threat—“as a trade issue that we have not dealt with.”

The bureaucratic battle between the military and civilian agencies over cyber security—and the budget that comes with it—has made threat assessments more problematic. General Alexander, the head of Cyber Command, is also the director of the N.S.A., a double role that has caused some apprehension, particularly on the part of privacy advocates and civil libertarians. (The N.S.A. is formally part of the Department of Defense.) One of Alexander’s first goals was to make sure that the military would take the lead role in cyber security and in determining the future shape of computer networks. (A Department of Defense spokesman, in response to a request to comment on this story, said that the department “continues to adhere to all laws, policies, directives, or regulations regarding cyberspace. The Department of Defense maintains strong commitments to protecting civil liberties and privacy.”)

The Department of Homeland Security has nominal responsibility for the safety of America’s civilian and private infrastructure, but the military leadership believes that the D.H.S. does not have the resources to protect the electrical grids and other networks. (The department intends to hire a thousand more cyber-security staff members over the next three years.) This dispute became public when, in March, 2009, Rodney Beckstrom, the director of the D.H.S.’s National Cybersecurity Center, abruptly resigned. In a letter to Secretary Janet Napolitano, Beckstrom warned that the N.S.A. was effectively controlling her department’s cyber operations: “While acknowledging the critical importance of N.S.A. to our intelligence efforts . . . the threats to our democratic processes are significant if all top level government network security and monitoring are handled by any one organization.” Beckstrom added that he had argued for civilian control of cyber security, “which interfaces with, but is not controlled by, the N.S.A.”

General Alexander has done little to reassure critics about the N.S.A.’s growing role. In the public portion of his confirmation hearing, in April, before the Senate Armed Services Committee, he complained of a “mismatch between our technical capabilities to conduct operations and the governing laws and policies.”

Alexander later addressed a controversial area: when to use conventional armed forces to respond to, or even preëmpt, a network attack. He told the senators that one problem for Cyber Command would be to formulate a response based on nothing more than a rough judgment about a hacker’s intent. “What’s his game plan? Does he have one?” he said. “These are tough issues, especially when attribution and neutrality are brought in, and when trying to figure out what’s come in.” At this point, he said, he did not have “the authority . . . to reach out into a neutral country and do an attack. And therein lies the complication. . . . What do you do to take that second step?”

Making the same argument, William J. Lynn III, the Deputy Secretary of Defense, published an essay this fall in Foreign Affairs in which he wrote of applying the N.S.A.’s “defense capabilities beyond the ‘.gov’ domain,” and asserted, “As a doctrinal matter, the Pentagon has formally recognized cyberspace as a new domain of warfare.” This definition raises questions about where the battlefield begins and where it ends. If the military is operating in “cyberspace,” does that include civilian computers in American homes?

Lynn also alluded to a previously classified incident, in 2008, in which some N.S.A. unit commanders, facing penetration of their bases’ secure networks, concluded that the break-in was caused by a disabling thumb drive; Lynn said that it had been corrupted by “a foreign intelligence agency.” (According to press reports, the program was just as likely to be the product of hackers as that of a government.) Lynn termed it a “wakeup call” and a “turning point in U.S. cyber defense strategy.” He compared the present moment to the day in 1939 when President Franklin D. Roosevelt got a letter from Albert Einstein about the possibility of atomic warfare.

But Lynn didn’t mention one key element in the commanders’ response: they ordered all ports on the computers on their bases to be sealed with liquid cement. Such a demand would be a tough sell in the civilian realm. (And a Pentagon adviser suggested that many military computer operators had simply ignored the order.)

A senior official in the Department of Homeland Security told me, “Every time the N.S.A. gets involved in domestic security, there’s a hue and cry from people in the privacy world.” He said, though, that coöperation between the military and civilians had increased. (The Department of Homeland Security recently signed a memorandum with the Pentagon that gives the military authority to operate inside the United States in case of cyber attack.) “We need the N.S.A., but the question we have is how to work with them and still say and demonstrate that we are in charge in the areas for which we are responsible.”

This official, like many I spoke to, portrayed the talk about cyber war as a bureaucratic effort “to raise the alarm” and garner support for an increased Defense Department role in the protection of private infrastructure. He said, “You hear about cyber war all over town. This”—he mentioned statements by Clarke and others—“is being done to mobilize a political effort. We always turn to war analogies to mobilize the people.”

In theory, the fight over whether the Pentagon or civilian agencies should be in charge of cyber security should be mediated by President Obama’s coördinator for cyber security, Howard Schmidt—the cyber czar. But Schmidt has done little to assert his authority. He has no independent budget control and in a crisis would be at the mercy of those with more assets, such as General Alexander. He was not the Administration’s first choice for the cyber-czar job—reportedly, several people turned it down. The Pentagon adviser on information warfare, in an e-mail that described the lack of an over-all policy and the “cyber-pillage” of intellectual property, added the sort of dismissive comment that I heard from others: “It’s ironic that all this goes on under the nose of our first cyber President. . . . Maybe he should have picked a cyber czar with more than a mail-order degree.” (Schmidt’s bachelor’s and master’s degrees are from the University of Phoenix.)

Howard Schmidt doesn’t like the term “cyber war.” “The key point is that cyber war benefits no one,” Schmidt told me in an interview at the Old Executive Office Building. “We need to focus on that fact. When people tell me that these guys or this government is going to take down the U.S. military with information warfare I say that, if you look at the history of conflicts, there’s always been the goal of intercepting the communications of combatants—whether it’s cutting down telephone poles or intercepting Morse-code signalling. We have people now who have found that warning about ‘cyber war’ has become an unlikely career path”—an obvious reference to McConnell and Clarke. “All of a sudden, they have become experts, and they get a lot of attention. ‘War’ is a big word, and the media is responsible for pushing this, too. Economic espionage on the Internet has been mischaracterized by people as cyber war.”

Schmidt served in Vietnam, worked as a police officer for several years on a SWAT team in Arizona, and then specialized in computer-related crimes at the F.B.I. and in the Air Force’s investigative division. In 1997, he joined Microsoft, where he became chief of security, leaving after the 9/11 attacks to serve in the Bush Administration as a special adviser for cyber security. When Obama hired him, he was working as the head of security for eBay. When I asked him about the ongoing military-civilian dispute, Schmidt said, “The middle way is not to give too much authority to one group or another and to make sure that we share information with each other.”

Schmidt continued, “We have to protect our infrastructure and our way of life, for sure. We do have vulnerabilities, and we do talk about worst-case scenarios” with the Pentagon and the Department of Homeland Security. “You don’t see a looming war and just wait for it to come.” But, at the same time, “we have to keep our shipping lanes open, to continue to do commerce, and to freely use the Internet.”

How should the power grid be protected? It does remain far too easy for a sophisticated hacker to break into American networks. In 2008, the computers of both the Obama and the McCain campaigns were hacked. Suspicion fell on Chinese hackers. People routinely open e-mails with infected attachments, allowing hackers to “enslave” their computers. Such machines, known as zombies, can be linked to create a “botnet,” which can flood and effectively shut down a major system. Hackers are also capable of penetrating a major server, like Gmail. Guesses about the cost of cyber crime vary widely, but one survey, cited by President Obama in a speech in May, 2009, put the price at more than eight billion dollars in 2007 and 2008 combined. Obama added, referring to corporate cyber espionage, “It’s been estimated that last year alone cyber criminals stole intellectual property from businesses worldwide worth up to one trillion dollars.”

One solution is mandated encryption: the government would compel both corporations and individuals to install the most up-to-date protection tools. This option, in some form, has broad support in the technology community and among privacy advocates. In contrast, military and intelligence eavesdroppers have resisted nationwide encryption since 1976, when the Diffie-Hellman key exchange (an encryption tool co-developed by Whitfield Diffie) was invented, for the most obvious of reasons: it would hinder their ability to intercept signals. In this sense, the N.S.A.’s interests align with those of the hackers.

John Arquilla, who has taught since 1993 at the U.S. Naval Postgraduate School in Monterey, California, writes in his book “Worst Enemies,” “We would all be far better off if virtually all civil, commercial, governmental, and military internet and web traffic were strongly encrypted.” Instead, many of those charged with security have adopted the view that “cyberspace can be defended with virtual fortifications—basically the ‘firewalls’ that everyone knows about. . . . A kind of Maginot Line mentality prevails.”

Arquilla added that America’s intelligence agencies and law-enforcement officials have consistently resisted encryption because of fears that a serious, widespread effort to secure data would interfere with their ability to electronically monitor and track would-be criminals or international terrorists. This hasn’t stopped sophisticated wrongdoers from, say, hiring hackers or encrypting files; it just leaves the public exposed, Arquilla writes. “Today drug lords still enjoy secure internet and web communications, as do many in terror networks, while most Americans don’t.”

Schmidt told me that he supports mandated encryption for the nation’s power and electrical infrastructure, though not beyond that. But, early last year, President Obama declined to support such a mandate, in part, Schmidt said, because of the costs it would entail for corporations. In addition to the setup expenses, sophisticated encryption systems involve a reliance on security cards and on constantly changing passwords, along with increased demands on employees and a ceding of control by executives to their security teams.

General Alexander, meanwhile, has continued to press for more authority, and even for a separate Internet domain—another Maginot Line, perhaps. One morning in September, he told a group of journalists that the Cyber Command needed what he called “a secure zone,” a separate space within the Internet to shelter the military and essential industries from cyber attacks. The secure zone would be kept under tight government control. He also assured the journalists, according to the Times, that “we can protect civil liberties, privacy, and still do our mission.” The General was more skeptical about his ability to please privacy advocates when he testified, a few hours later, before the House Armed Services Committee: “A lot of people bring up privacy and civil liberties. And then you say, ‘Well, what specifically are you concerned about?’ And they say, ‘Well, privacy and civil liberties.’ . . . Are you concerned that the anti-virus program that McAfee runs invades your privacy or civil liberties?’ And the answer is ‘No, no, no—but I’m worried that you would.’ ”

This summer, the Wall Street Journal reported that the N.S.A. had begun financing a secret surveillance program called Perfect Citizen to monitor attempted intrusions into the computer networks of private power companies. The program calls for the installation of government sensors in those networks to watch for unusual activity. The Journal noted that some companies expressed concerns about privacy, and said that what they needed instead was better guidance on what to do in case of a major cyber attack. The N.S.A. issued a rare public response, insisting that there was no “monitoring activity” involved: “We strictly adhere to both the spirit and the letter of U.S. laws and regulations.”

A former N.S.A. operative I spoke to said, of Perfect Citizen, “This would put the N.S.A. into the job of being able to watch over our national communications grid. If it was all dot-gov, I would have no problem with the sensors, but what if the private companies rely on Gmail or att.net to communicate? This could put the N.S.A. into every service provider in the country.”

The N.S.A. has its own hackers. Many of them are based at a secret annex near Thurgood Marshall International Airport, outside Baltimore. (The airport used to be called Friendship Airport, and the annex is known to insiders as the FANX, for “Friendship annex.”) There teams of attackers seek to penetrate the communications of both friendly and unfriendly governments, and teams of defenders monitor penetrations and attempted penetrations of U.S. systems. The former N.S.A. operative, who served as a senior watch officer at a major covert installation, told me that the N.S.A. obtained invaluable on-the-job training in cyber espionage during the attack on Iraq in 1991. Its techniques were perfected during the struggle in Kosovo in 1999 and, later, against Al Qaeda in Iraq. “Whatever the Chinese can do to us, we can do better,” the technician said. “Our offensive cyber capabilities are far more advanced.”

Nonetheless, Marc Rotenberg, the president of the Electronic Privacy Information Center and a leading privacy advocate, argues that the N.S.A. is simply not competent enough to take a leadership role in cyber security. “Let’s put the issue of privacy of communications aside,” Rotenberg, a former Senate aide who has testified often before Congress on encryption policy and consumer protection, said. “The question is: Do you want an agency that spies with mixed success to be responsible for securing the nation’s security? If you do, that’s crazy.”

Nearly two decades ago, the Clinton Administration, under pressure from the N.S.A., said that it would permit encryption-equipped computers to be exported only if their American manufacturers agreed to install a government-approved chip, known as the Clipper Chip, in each one. It was subsequently revealed that the Clipper Chip would enable law-enforcement officials to have access to data in the computers. The ensuing privacy row embarrassed Clinton, and the encryption-equipped computers were permitted to be exported without the chip, in what amounted to a rebuke to the N.S.A.

That history may be repeating itself. The Obama Administration is now planning to seek broad new legislation that would enable national-security and law-enforcement officials to police online communications. The legislation, similar to that sought two decades ago in the Clipper Chip debate, would require manufacturers of equipment such as the BlackBerry, and all domestic and foreign purveyors of communications, such as Skype, to develop technology that would allow the federal government to intercept and decode traffic.

“The lesson of Clipper is that the N.S.A. is really not good at what it does, and its desire to eavesdrop overwhelms its ability to protect, and puts at risk U.S. security,” Rotenberg said. “The N.S.A. wants security, sure, but it also wants to get to capture as much as it can. Its view is you can get great security as long as you listen in.” Rotenberg added, “General Alexander is not interested in communication privacy. He’s not pushing for encryption. He wants to learn more about people who are on the Internet”—to get access to the original internal protocol, or I.P., addresses identifying the computers sending e-mail messages. “Alexander wants user I.D. He wants to know who you are talking to.”

Rotenberg concedes that the government has a role to play in the cyber world. “We privacy guys want strong encryption for the security of America’s infrastructure,” he said. He also supports Howard Schmidt in his willingness to mandate encryption for the few industries whose disruption could lead to chaos. “Howard is trying to provide a reasoned debate on an important issue.”

Whitfield Diffie, the encryption pioneer, offered a different note of skepticism in an e-mail to me: “It would be easy to write a rule mandating encryption but hard to do it in such a way as to get good results. To make encryption effective, someone has to manage and maintain the systems (the way N.S.A. does for D.O.D. and, to a lesser extent, other parts of government). I think that what is needed is more by way of standards, guidance, etc., that would make it easier for industry to implement encryption without making more trouble for itself than it saves.”

More broadly, Diffie wrote, “I am not convinced that lack of encryption is the primary problem. The problem with the Internet is that it is meant for communications among non-friends.”

What about China? Does it pose such a threat that, on its own, it justifies putting cyber security on a war footing? The U.S. has long viewed China as a strategic military threat, and as a potential adversary in the sixty-year dispute over Taiwan. Contingency plans dating back to the Cold War include calls for an American military response, led by a Navy carrier group, if a Chinese fleet sails into the Taiwan Strait. “They’ll want to stop our carriers from coming, and they will throw whatever they have in cyber war—everything but the kitchen sink—to blind us, or slow our fleet down,” Admiral McVadon, the retired defense attaché, said. “Our fear is that the Chinese may think that cyber war will work, but it may not. And that’s a danger because it”—a test of cyber warfare—“could lead to a bigger war.”

However, the prospect of a naval battle for Taiwan and its escalation into a cyber attack on America’s domestic infrastructure is remote. Jonathan Pollack, an expert on the Chinese military who teaches at the Naval War College in Newport, Rhode Island, said, “The fact is that the Chinese are remarkably risk-averse.” He went on, “Yes, there have been dustups, and the United States collects intelligence around China’s border, but there is an accommodation process under way today between China and Taiwan.” In June, Taiwan approved a trade agreement with China that had, as its ultimate goal, a political rapprochement. “The movement there is palpable, and, given that, somebody’s got to tell me how we are going to find ourselves in a war with China,” Pollack said.

Many long-standing allies of the United States have been deeply engaged in cyber espionage for decades. A retired four-star Navy admiral, who spent much of his career in signals intelligence, said that Russia, France, Israel, and Taiwan conduct the most cyber espionage against the U.S. “I’ve looked at the extraordinary amount of Russian and Chinese cyber activity,” he told me, “and I am hard put to it to sort out how much is planning for warfare and how much is for economic purposes.”

The admiral said that the U.S. Navy, worried about budget cuts, “needs an enemy, and it’s settled on China,” and that “using what your enemy is building to justify your budget is not a new game.”

There is surprising unanimity among cyber-security experts on one issue: that the immediate cyber threat does not come from traditional terrorist groups like Al Qaeda, at least, not for the moment. “Terrorist groups are not particularly good now in attacking our computer system,” John Arquilla told me. “They’re not that interested in it—yet. The question is: Do vulnerabilities exist inside America? And, if they do, the terrorists eventually will exploit them.” Arquilla added a disturbing thought: “The terrorists of today rely on cyberspace, and they have to be good at cyber security to protect their operations.” As terrorist groups get better at defense, they may eventually turn to offense.

Jeffrey Carr, a Seattle-based consultant on cyber issues, looked into state and non-state cyber espionage throughout the recent conflicts in Estonia and Georgia. Carr, too, said he was skeptical that China or Russia would mount a cyber-war attack against the United States. “It’s not in their interest to hurt the country that is feeding them money,” he said. “On the other hand, it does make sense for lawless groups.” He envisaged “five- or six-year-old kids in the Middle East who are working on the Internet,” and who would “become radicalized fifteen- or sixteen-year-old hackers.” Carr is an advocate of making all Internet service providers require their customers to use verifiable registration information, as a means of helping authorities reduce cyber espionage.

Earlier this year, Carr published “Inside Cyber Warfare,” an account, in part, of his research into cyber activity around the world. But he added, “I hate the term ‘cyber war.’ ” Asked why he used “cyber warfare” in the title of his book, he responded, “I don’t like hype, but hype sells.”

Why not ignore the privacy community and put cyber security on a war footing? Granting the military more access to private Internet communications, and to the Internet itself, may seem prudent to many in these days of international terrorism and growing American tensions with the Muslim world. But there are always unintended consequences of military activity—some that may take years to unravel. Ironically, the story of the EP-3E aircraft that was downed off the coast of China provides an example. The account, as relayed to me by a fully informed retired American diplomat, begins with the contested Presidential election between Vice-President Al Gore and George W. Bush the previous November. That fall, a routine military review concluded that certain reconnaissance flights off the eastern coast of the former Soviet Union—daily Air Force and Navy sorties flying out of bases in the Aleutian Islands—were redundant, and recommended that they be cut back.

“Finally, on the eve of the 2000 election, the flights were released,” the former diplomat related. “But there was nobody around with any authority to make changes, and everyone was looking for a job.” The reality is that no military commander would unilaterally give up any mission. “So the system defaulted to the next target, which was China, and the surveillance flights there went from one every two weeks or so to something like one a day,” the former diplomat continued. By early December, “the Chinese were acting aggressively toward our now increased reconnaissance flights, and we complained to our military about their complaints. But there was no one with political authority in Washington to respond, or explain.” The Chinese would not have been told that the increase in American reconnaissance had little to do with anything other than the fact that inertia was driving day-to-day policy. There was no leadership in the Defense Department, as both Democrats and Republicans waited for the Supreme Court to decide the fate of the Presidency.

The predictable result was an increase in provocative behavior by Chinese fighter pilots who were assigned to monitor and shadow the reconnaissance flights. This evolved into a pattern of harassment in which a Chinese jet would maneuver a few dozen yards in front of the slow, plodding EP-3E, and suddenly blast on its afterburners, soaring away and leaving behind a shock wave that severely rocked the American aircraft. On April 1, 2001, the Chinese pilot miscalculated the distance between his plane and the American aircraft. It was a mistake with consequences for the American debate on cyber security that have yet to be fully reckoned.

Japanese statements violate China's sovereignty

Source: Xinhua

HANOI - Chinese Assistant Foreign Minister Hu Zhengyue accused Japanese representatives here Friday of violating China's sovereignty and territorial integrity through statements to the media during the summit meetings between the Association of Southeast Asian Nations (ASEAN) and its partners.

The Japanese side also made untrue statements about the content of a meeting between Chinese and Japanese foreign ministers held earlier in the day, he said.

Hu said the Japanese move ruined the atmosphere for leaders from the two sides to conduct talks in the Vietnamese capital.

The Japanese side should take full responsibility for any consequence to arise, the Chinese diplomat said.

It was known to all that China had always tried to preserve and push forward bilateral relations between China and Japan on the basis of the principles set out in the four political documents signed by the two countries, Hu said.

However, the truth was that the diplomatic authority of Japan, in cahoots with other nations, tried to create noises on the issue of the Diaoyu Islands in the East China Sea in the lead-up to the summits between ASEAN and its partners. On top of that, during the summits, the Japanese side frequently made use of media outlets to make statements and comments that violated the sovereignty and territorial integrity of China, Hu said.

When meeting with his Japanese counterpart, Seiji Maehara, Chinese Foreign Minister Yang Jiechi set forth China's principled position on the issue concerning the Diaoyu Islands, stressing that the Diaoyu Islands had been an integral part of Chinese territory since ancient times, Hu said.

The Japanese side was making untrue statements about the content of the meeting and distorted China's stance in implementing the principled consensus between the two countries on the East China Sea issue, Hu said.

U.S. not seeking to "contain" China: Clinton

Source: Reuters By Arshad Mohammed

(Reuters) - Secretary of State Hillary Clinton denied on Thursday the United States was seeking to contain China as she began a two-week trip to an Asia-Pacific region rattled by recent Chinese assertiveness.

Washington and Beijing have clashed this year over issues including the value of China's currency, U.S. arms sales to Taiwan and U.S. President Barack Obama's February meeting with the Dalai Lama, the exiled Tibetan spiritual leader.

China's relations with its neighbors have also been strained by territorial disputes -- notably with Japan -- but also with South East Asian nations who have competing claims over the South China Sea.

The top U.S. diplomat, starting a trip to seven Asia-Pacific nations including China, sought to strike a balance between the U.S. desire to work with Beijing and its concerns about some Chinese policies.

"The relationship between China and the United States is complex and of enormous consequence and we are committed to getting it right," Clinton said in a speech on U.S. Asia-Pacific policy delivered in Honolulu.

"There are some in both countries who believe that China's interests and ours are fundamentally at odds. They apply a zero-sum calculation ... so whenever one of us succeeds, the other must fail," she said. "But that is not our view."

While saying the two nations work together on many issues, Clinton also alluded to their many differences, including U.S. desires to see the Chinese currency appreciate as well as U.S. criticism of China's human rights record.

"There are also many in China who still believe that the U.S. is bent on containing China and I would simply point out that since the beginning of our diplomatic relations, China has experienced breathtaking growth and development," she said.

"This is due, of course, to the hard work of the Chinese people. But U.S. policy has consistently -- through Republican and Democratic administrations and Congresses -- supported this goal since the 1970s," she said.

Clinton's trip began on Wednesday with a stop in Hawaii to meet Japan's foreign minister. On Thursday she continues to Vietnam for the East Asia summit and then heads to Cambodia, Malaysia, Papua New Guinea, New Zealand and Australia.

While China was not originally on her itinerary, the State Department added a last-minute detour to China's Hainan Island on Saturday so Clinton could meet Chinese State Councilor Dai Bingguo, a key figure in managing the strained U.S.-China relationship who will not attend the summit in Hanoi.

SEEKING COOPERATIVE SOLUTIONS

Sino-Japanese relations have been on edge since last month after Japan detained a Chinese trawler captain whose boat collided with Japanese patrol ships near the disputed islands -- called Senkaku in Japan and Diaoyu in China.

Reports that China had curtailed its exports of so-called rare earth minerals, vital for the production of high-tech goods, to Japan following the dispute have rattled policy makers and markets fearing a scarcity of the commodities.

Clinton's speech made no reference to that dispute, but she made clear the U.S. view that China and its neighbors should work cooperatively to resolve their territorial disputes.

In Hanoi in July, Clinton signaled new U.S. engagement in the South China Sea issue, emphasizing that Washington believed territorial disputes in the region had global implications because of its key role as a trade and shipping crossroads and potentially rich source of natural resources.

Clinton said she was pleased by signs that China -- which initially told the United States to stay out of the disputes it argued should be dealt with bilaterally -- was willing to address them through regional groupings.

Built around this week's East Asia Summit in Hanoi, the Clinton's two-week trip is designed to demonstrate the U.S. commitment to the region as the United States, and other nations in the region, grapple with China's economic and military rise.

"There are some who say that this long legacy of American leadership in Asia Pacific is coming to a close -- that we are not here to stay. I say look at our record. It tells a very different story," Clinton said. "We are focused on a distant time horizon -- one that stretches out for decades to come."

China Is Said to Resume Shipping Rare Earth Minerals

Source: New York Times By Keith Bradsher

BAOTOU, China — The Chinese government on Thursday abruptly ended its unannounced export embargo on crucial rare earth minerals to the United States, Europe and Japan, four industry officials said.

The embargo, which has raised trade tensions, ended as it had begun — with no official acknowledgment from Beijing, or any explanation from customs agents at China’s ports.

Rare earths are increasingly in demand for their use in a broad range of sophisticated electronics, from smartphones to smart bombs.

Having blocked shipments of raw rare earth minerals to Japan since mid-September, and to the United States and Europe since early last week, Chinese customs agents on Thursday morning allowed shipments to resume to all three destinations, the industry officials said. They spoke only on condition of anonymity because of the business and diplomatic delicacy of the issue.

Shipments to Japan, however, still face additional scrutiny and some delays, the officials said.

Even with containers of rare earths once again leaving China’s docks, foreign buyers still face potential shortages. As China’s own industrial needs for rare earths have grown, Beijing has repeatedly reduced its export quotas for the minerals over the last five years. So even when China is shipping its full quotas, the outbound supply is now well below world demand.

Moreover, the tight export quotas have caused world prices to soar, even while holding steady in China.

Officials in two departments of China’s General Administration of Customs in Beijing declined to comment on Thursday evening about the status of rare earth exports. The commerce ministry, which handles trade policy, also had no immediate comment.

Although deposits of rare earths are found in various parts of the world, including the United States, China produces about 95 percent of the global supply of the minerals. That is largely because rare earth mining and processing can be so environmentally risky, creating toxic and even radioactive wastes, that other countries have tended to avoid or abandon production. Only recently have other nations begun scrambling to develop or expand their own mining capabilities.

The Chinese shipments resumed Thursday morning only hours before Secretary of State Hillary Rodham Clinton raised the embargo issue at a news conference in Honolulu, where she announced plans to visit China on Saturday to pursue the matter with Chinese officials.

Mrs. Clinton spoke after meeting with Japan’s foreign minister, Seiji Maehara, and said that the suspension of shipments had been a “wake-up call” and that both countries would have to find alternative sources of rare earth materials.

Because China is on the opposite side of the international dateline from Honolulu, it was already midday on Thursday in China by the time Mrs. Clinton spoke in Honolulu on Wednesday. Later, after the New York Times Web site reported that the embargo had been lifted, an administration official said the United States was still seeking clarification from China.

In recent weeks, senior Chinese commerce ministry officials have insisted that they had not issued any regulations halting shipments. They have suggested at various times — implausibly, in the view of industry executives — that the halt resulted from a spontaneous and simultaneous decision by the country’s 32 authorized rare earth exporters not to make shipments, whether because of a deterioration in Sino-Japanese relations or a greater thoroughness on the part of customs inspectors.

Under this year’s quota — 30,300 metric tons of authorized shipments — only a few thousand metric tons remain to be exported in 2010. Meanwhile, annual demand outside China for raw rare earths approaches 50,000 tons, according to industry estimates.

The Chinese government assigns its quotas to the authorized exporters, who often trade those rights like commodities. As recently as 2008, the quota rights themselves had no market value. But lately, with rising demand, the value of the remaining quotas has soared to the point that the right to export a single ton of rare earths from China now sells for about $40,000, including special Chinese taxes.

That is a sizable, additional cost for buyers of neodymium, a rare earth used to make lightweight, powerful magnets essential to technologies including giant wind turbines, gasoline-electric cars and Apple iPhones.

Neodymium sells for about $40,000 a metric ton in China, having recovered from a nose-dive during the global economic crisis. But it sells for twice that much outside the country because of the export restrictions, according to data from Metal Pages, a database service in London.

The cost of quotas has become exorbitant for users of lanthanum, which is vital for the catalytic converters that clean the exhaust of conventional, gasoline-powered cars. It is mostly produced here in Baotou, a smoggy mining and steel city in China’s Inner Mongolia that is the capital of China’s rare earth industry. Lanthanum sells for less than $4,500 a ton in China, but up to 10 times that much outside China because of the export restrictions.

Such price differences have created a big incentive for companies to move factories to China, and many already have.

China’s shipping embargo has caused much more distress in Japan than in the United States or Europe, and not just because Japan’s shipments were cut off much earlier. It is because Japan tends to be affected more than other industrial nations by the way China sets its rare earth export quotas.

China’s quotas — and the shipping embargo — have involved only shipments in which the material has a rare earth content of about 50 percent or more. High-technology materials made from rare earths, like special magnetic powders for the clean energy and electronics industries, or polishing powders for the glass industry, are not subject to quotas and are inexpensively available.

Because the United States and Europe mainly buy highly processed rare earth powders from China, the customs policy of blocking shipments of raw rare earths had a limited, mostly symbolic effect. Japan, in contrast, is the biggest importer of raw rare earths and tends to process them into industrial materials. So Japan is more dependent on the materials affected by China’s tightening quotas.

It was on Oct. 18 that the Chinese government broadened its halt in raw rare earths to include the United States and Europe. That step enabled customs officials to take the position that they were checking all rare earth shipments closely and were not singling out Japan.

The move also occurred only hours after Zhang Guobao, the country’s top energy official, summoned foreign reporters in Beijing. There, he delivered a blistering denunciation of the Obama administration’s decision the previous Friday to begin investigating whether China’s clean energy policies violated the World Trade Organization’s free trade rules. But the exact interaction between American policy decisions and Chinese customs enforcement actions is unclear.

For China, the embargo on rare earth shipments has provided at least some geopolitical leverage. The halt was one of a series of measures that China took after Japan detained the captain of a Chinese fishing trawler that collided with two Japanese patrol boats; Japan later released the trawler’s captain.

Japanese companies had been able to weather the embargo without any significant factory shutdowns because many Japanese companies had accumulated rare earth stockpiles in the last few years. Still, the interruption of shipments caused dismay and alarm in the Japanese business community and Japan’s government.

But China’s willingness to play economic hardball could yet have long-term drawbacks, if it prompts multinationals to reduce their reliance on manufacturing in China and spread their investments among more countries.

Chinese May Have Fastest Supercomputer, Nvidia Says

Source: Bloomberg

China’s National University of Defense Technology may have designed the world’s fastest supercomputer with speeds 43 percent greater than previous systems, said Nvidia Corp., which supplied parts for the machine.

The university’s Tianhe-1A set a performance record of 2.507 petaflops, or more than 2 quadrillion calculations per second, Sumit Gupta, senior product manager for Nvidia, said on a conference call with reporters. That would make it faster than any system on the global Top 500 list of supercomputers published in June, Gupta said.

China is investing in supercomputers to improve research and simulation for climate modeling, genomics, alternative energy, seismic imaging and defense. Since China began investing in the technology in 2002, it has risen to third globally in overall high-performance computing power, trailing the U.S. and the European Union.

“They’ve basically recognized the fact that they need to invest in high-performance computing to continue to advance their technology, to continue to advance their research and science,” Gupta said. “This is recognition that the United States had about 50 years ago.”

175,000 Laptops

The Tianhe-1A uses 7,168 Nvidia Tesla M2050 graphics processing units and 14,336 Intel Corp. chips. It uses power three times more efficiently than current supercomputers, according to Santa Clara, California-based Nvidia, which is the second-largest maker of graphics chips after Intel.

The supercomputer is likely to be the fastest in the world when the official list is unveiled Nov. 15, said Jack Dongarra, a computer scientist who helps maintain the rankings. He knows of no other supercomputer that is equal to it, he said.

The system, housed at the National Supercomputing Center in Tianjin, has the computing power of 175,000 laptops, Nvidia said. A petaflop is a measure of a computer’s processing speed and can be expressed as a thousand trillion, or quadrillion, operations per second. The speed of this machine is 2.5 petaflops.

“The scientific research that is now possible with a system of this scale is almost without limits,” Liu Guangming, president of the center in Tianjin, said in a statement supplied by Nvidia. “We could not be more pleased with the results.”

Officials at the supercomputing center in Tianjin and at the computer science department of the National University of Defense Technology didn’t immediately respond to requests for comment.

Oak Ridge ‘Jaguar’

The new computer isn’t currently referenced on the websites of either organization.

China had two of the top 10 computers on the June list of the world’s fastest computers, compared with seven for the U.S.

The fastest computer on the current list is Jaguar, built by Seattle-based Cray Inc. and installed at the Oak Ridge National Laboratory in Tennessee. The Jaguar has clocked 1.75 petaflops in testing.

In June, China’s Nebulae, at the National Supercomputing Center in Shenzhen, took the No. 2 spot with a measured speed of 1.271 petaflops.

The U.S. has been replaced in the top spot for the fastest computer before, only to reclaim the position. In 2002, Japan claimed the No. 1 position with the Earth Simulator.

The Tianhe-1A, unlike the Jaguar, relies on a combination of U.S. processors and Chinese technology, said Dongarra, who is the director of the innovative computing laboratory at the University of Tennessee.

“The interconnect -- the thing which moves information from process to process -- is Chinese based,” he said. “That is significant in the sense that the technology is not U.S.- led.”

The Chinese may try to replace the U.S. processors with their own in the next few years, Dongarra said.